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Crypto-Currency Rhetoric Reflects Conflicts of Interests in the Financial System

Traders Magazine Online News, September 27, 2017

David Weisberger

There has been a lot of coverage in the press about Bitcoin and other Crypto-Currencies lately, sparked by the decision of the Chinese government to close down exchanges in their country and comments by high-profile financial leaders. When trying to understand why people say or do things, consider their motives. 

For example, while Jamie Dimon’s most recent commentary on BitCoin reflects  pure self-interest, it may well turn out to be true.   His prediction that if crypto-currencies get “too big” that governments will close them down, reflects both the interests of banks as well as the government.  The governments interest is rooted in the Federal Reserve’s mission to utilize monetary policy to influence the economy towards low inflation economic growth.  If the US dollar’s supremacy as a reserve currency was threatened by competing cryptocurrencies, it is not hard to predict that they would want to take action to ban them.  The same is true for the Treasury Department, which continues to finance massive budget deficits at extremely low (negative?) real interest rates.  This is enabled by the significant global demand for US dollars.  If THAT were threatened, either by a loss in confidence in the dollar, or because of competing currencies gaining ascendance, it would threaten this ability driving up the cost of servicing our multi-trillion-dollar debt.  The result would be a massive spike in the budget deficit and widespread financial dislocation, so it is pretty simple to understand the motivation.

So, while Bitcoin and other crypto-currencies are a long way from posing such a threat, it is important to understand that Mr. Dimon’s observation is not a hollow one.  Sadly, there is even historical precedent for the action he suggested.   It occurred in the Great Depression, when the US Government, needing desperately to monetize the budget deficit created by the New Deal, effectively banned the use of gold.  They acted first to confiscate US citizen’s holdings of gold at the (then) statutory price while banning private transactions in gold.  Next, having procured the gold from its own citizens at an artificially low price, they revalued the price of gold HIGHER in dollars, to decrease the cost of servicing the government’s debt.    Since that time, many have suggested that the action should have been ruled unconstitutional, and that it could never happen again, but it is impossible to ignore the historical parallel.

Will the government act to do something similar to bitcoin?  I don’t know, but at least we should all understand why they might.  We should also be cognizant of why people like Jamie Dimon must be expected to "dismiss" bitcoin in their rhetoric.

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